Diversifying from rentals into stocks or farmland

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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tchammer
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Diversifying from rentals into stocks or farmland

Post by tchammer » 14 Nov 2017 16:04

I thought I would post this, as I was looking at pqpq's post on Borrowing on Margin, and thought he might be on to something that might apply to my situation. We are currently close to 100% invested into rental properties, and I would like to start to diversify into stocks and or farmland. My wife and I own a construction company, as well as run 100 head cow/calf operation. We are still acquiring and building rental property, but I really want to look at options to get into farming close to fulltime, as well as diversify our investments beyond just rental property. I am 43 years old and been in business for the past 20 years. We have never pulled very much income out of our company, as it generally does not produce much, but are getting a little tired of the never ending "sacrifice". We would like to be able to start seeing a little more income into our pockets or at least going towards our area of interest, farming, thus why farmland would be a potential investment to work towards. We have toyed with the idea of maxing out our mortgage on some of the rental property and using the cash to invest into land, or putting the money into a margin account to purchase index funds. We would only add on to the mortgage what the property could debt service itself, though this would essentially leave us without ever seeing any cash flow from that property for another 20 years, not exactly an exciting prospect. Here is a quick snapshot of what we have to work with.
4plex A value=$850,000 current mortgage=$400,000 to be paid off in 6 years
4plex B value=$850,000 current mortgage=$500,000 to be paid off in 12 years
2 bay shop value=$350,000 currently mortgaged for $260,000 to provide operating loan and downpayment on tow shop
tow shop value=$650,000 currently mortgaged for $450,000 to be paid off in 12 years, or tenant purchases in 4 years paying out current mortgage and we pocket around $125,000 before tax
cattle value =$250,000 currently owe $75,000 to be paid off in 4 years

We have some more property as well, but all of it is tied up in partnerships so is not really available for reinvestment at this time. Like I said before we are just kind of brainstorming to see if there is some options that we may not have though of to either provide more diversified investment or to just be able to relax a bit. We are pretty comfortable with risk so I thought I would throw this out and see what some of you might come up with for ideas.

Thanks.

OhGreatGuru
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Re: Diversifying from rentals into stocks or farmland

Post by OhGreatGuru » 14 Nov 2017 17:13

This is rather above my pay grade, but I see some contradictions in your objectives.
We have never pulled very much income out of our company, as it generally does not produce much, but are getting a little tired of the never ending "sacrifice". We would like to be able to start seeing a little more income into our pockets or at least going towards our area of interest, farming, thus why farmland would be a potential investment to work towards.
- I haven't heard of many farmers who are not making a never-ending "sacrifice", or who are able to pull a lot of net income out of their occupation.
- It is not clear if you want to invest in farm land, or farming.
- Borrowing against your rental properties means you will still have all the headaches of being a landlord, with no positive cash flow to reward your trouble. How is this going to simplify your life or get you more income? Why not just sell them?
- Is plowing money into your farming adventure or farmland investment providing you any diversification?
- Do you want to keep running your construction company, or sell it?

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kcowan
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Re: Diversifying from rentals into stocks or farmland

Post by kcowan » 14 Nov 2017 19:08

You are indeed diversified. I admire your many initiatives. What you have not provided is any indication of how each of your investments is performing. Without that, it is hard to advise alternatives that might be better. You are obviously heavily dependent on property values and rental incomes. But you seem to be renting lots of money which is another way of saying what OGG is saying. Is the real winner the lenders?

100 head of cattle seems to be a major investment. What are you aiming for?

Investing in the markets is putting your future financial position in the hands of others. Ore you OK with that?
For the fun of it...Keith

tchammer
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Re: Diversifying from rentals into stocks or farmland

Post by tchammer » 15 Nov 2017 00:27

To provide a bit more information, OGG asked why not just sell, which has crossed my mind but I think I would roughly have about 1.2 million before taxes if I sold these properties. Since I know very little about other lines of investment I would feel pretty vulnerable putting this amount into stocks and such. As for the farmland, I feel the only way to even come close to paying for farmland is to farm it ourselves, as for the most part farmland does not come close to debt servicing if you borrow to rent it out. The rentals currently are being paid down as fast as we can, which means no positive cash flow, in fact we probably put in about $10,000/yr out of pocket. The two 4plexs will net us about $96,000/yr after utilities, property tax and insurance when they are paid off. If the tow shop tenant does not exercise his option to purchase we will net about $54,000/yr on it when paid off. The 2 bay shop would net us about $36,000/yr except we currently use the bigger bay for our company so we only make $12,000/yr on the smaller bay. For the most part I also have a hard time selling something that someone else is paying off for me, but it may be an option. We don't mind taking care of the rentals as for the most part it is a part time job and they are all in the small town that we live in. We would have to bring the cow herd up to about 250 head to avg. about $65,000/yr in household income if we continue to rent all our pasture and buy our feed. Just for info. if we bought 640 acres of pastureland in our area it would cost about $1.2 million, we would be able to only feed 100 cow calf pairs on it for about 160 days. The cost to rent pasture is $1.20 per day for one cow/calf pair, so you can rent this same amount of land for approx.$19,200/yr. As you can see that is where buying farmland would have to be with a large downpayment in cash, or has to be subsidized substantially by another revenue stream. My gut instinct is telling me that I should just keep plodding along and stay the course, continue to build up the cow herd, and potentially look at subsidizing the farmland purchase further down the road when some more rental revenue stream comes available. But sometimes a different perspective is needed to see if I am not seeing the forest for the trees so to speak.

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Re: Diversifying from rentals into stocks or farmland

Post by Spudd » 15 Nov 2017 11:48

Assuming your mortgage payoff timelines are based on the accelerated payments you're currently doing, in 6 years you'll have free cash flow of 48k from 4plex #1. If you plow that into 4plex #2 then after 8-10 years you should have free cash flow of 96k/year, enough to live on.

Personally, since you say you're averse to stocks, I would do one of the following:

1 - Stop accelerated payments on the mortgages and enjoy more free cash now. You say your issue is you want to stop being so frugal... you have the means to do this already.
2- Wait for 6 years and then enjoy that 48k of free cash flow from 4plex #1.
3 - Take the halfway approach - reduce accelerated payments to loosen up the purse strings a bit, and then in say 8-10 years 4plex #1 will be paid off.

Farming to me seems quite risky and you already have everything you need investment-wise to last you the rest of your life, as long as you're not living a Hollywood lifestyle. So I would just stick with the current rentals, if it were me. But I know nothing about farming and am more comfortable with stocks, so clearly my advice can easily be ignored.

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